Abstract
Volatility and investor sentiment have been factors for the slow adoption rate of Bitcoin (BTC) that was first recognized in 2008 as a potential store of value, investment vehicle and a hedge alternative to gold during a recession. The purpose of this applied mathematics study will use a multivariate DCC GARCH model. Bitcoin holds its ground in volatility. This study examines Bitcoin as an investment and hedge alternative to gold as well as the major stock index. To perform the research to explore the viability of Bitcoin as an investment and hedge alternative to gold, the authors conducted a DCC GARCH model analysis. The findings of this research paper confirm Bitcoin’s cyclical performance between volatility and adoption. The findings give a strong ground for Bitcoin as the new digital currency, store of value, medium of exchange, and a unit of account and incentivize further research by theorists, scholars and examiners. The significance of this applied mathematics research and analysis will allow an unstoppable, incorruptible, and uncontrollable store of value, and investment vehicle, without governmental or institutional intervention. This study contributes by comparing and contrasting volatility stability based on the return levels of each Bitcoin on major indexes traded with BTC (based on fiat currencies) and gold.
Highlights
Bitcoin as an investment and hedge alternative to gold has been tackled in the literature and this research will explore its application based on a dynamic conditional correlation (DCC) generalized autoregressive conditional heteroskedasticity (GARCH) model analysis
One limitation identified by the authors is that explanatory variables might be missing observations as markets are closed on weekends and bank holidays, the researcher will use a model with a foundation of the multivariate GARCH process (Poon 2005), as has been proved to be the most appropriate model for stock index, commodity (Hansen and Lunde 2005), and currencies (Brownlees et al 2011)
GLD has a lot less volume and high price, compared to BTC-United States Dollar (USD), which provides evidence that a small number of large investors still hold a belief in gold, and we can potentially interpret that they support ETFs (Exchange Traded Funds) in general
Summary
Publisher’s Note: MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. Decentralised technology is currently present in cryptocurrencies (Scott et al 2017) and has the potential to be explored much more. Modelling investor perception is straightforward, but modelling the impact of halving and volatility is complicated (Kurtz and Schrank 2007). Volatility and adoption is a ‘chicken and egg’ concept with Bitcoin (BTC). Bitcoin as an investment and hedge alternative to gold has been tackled in the literature and this research will explore its application based on a dynamic conditional correlation (DCC) generalized autoregressive conditional heteroskedasticity (GARCH) model analysis. Modelling investor perception is straightforward, yet modelling the impact of halving, and volatility is complicated (Garman and Klass 1980). Those motivations already exist in many parts of the world which is why this study provides utility. First the introduction, followed by the literature review of previous work discussing Bitcoin’s potential ramifications, the methodology, experimental results analysis, and a conclusion
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